Hedging USD exposure

[BBCWatcher]

Then those reasons will need to be sufficient enough to convince the people that their personal loss of funds is worth it to deliver justice to the evil coinbase. There aren't a lot of reasons that fit the bill.

Well, I think you’re overestimating how many people are holding USDC in significant quantities. And underestimating the range of scenarios and probabilities in which USDC is seriously impaired or zeroed. And those are just the whole group risks. There are also the individualized and smaller group risks.

That’s why reasonable portfolio diversification makes sense. No individual vehicle is immune to significant or catastrophic risks.

Your goal to mitigate the slight risk that the U.S. dollar falls by 15% relative to the Singapore dollar over the next year (it’s something like that) is one thing, and maybe that’s possible. The Singapore dollar is an odd currency in certain respects, and I’m not yet finding a convenient vehicle for retail investors to hedge against this particular risk. But maybe I’m not looking in the right places. However, that seems metaphorically like a 3 pack a day tobacco smoker who’s concerned about possible pesticide residues in tobacco and asking where to find organic cigarettes. I guess that’d be a bit of progress in reducing risks, but really? And that’s not a perfect metaphor since tobacco-related risks follow a risk accumulation curve whereas portfolio overconcentration risks are acute every moment you’re overconcentrated.

 

[6isc70087]

$1 in each currency that your bank has ? Give you perfect rebalancing any way the USD moves

 

[TiedInsurer]

Well, I think you’re overestimating how many people are holding USDC in significant quantities. And underestimating the range of scenarios and probabilities in which USDC is seriously impaired or zeroed. And those are just the whole group risks. There are also the individualized and smaller group risks.

That’s why reasonable portfolio diversification makes sense. No individual vehicle is immune to significant or catastrophic risks.

Your goal to mitigate the slight risk that the U.S. dollar falls by 15% relative to the Singapore dollar over the next year (it’s something like that) is one thing, and maybe that’s possible. The Singapore dollar is an odd currency in certain respects, and I’m not yet finding a convenient vehicle for retail investors to hedge against this particular risk. But maybe I’m not looking in the right places. However, that seems metaphorically like a 3 pack a day tobacco smoker who’s concerned about possible pesticide residues in tobacco and asking where to find organic cigarettes. I guess that’d be a bit of progress in reducing risks, but really? And that’s not a perfect metaphor since tobacco-related risks follow a risk accumulation curve whereas portfolio overconcentration risks are acute every moment you’re overconcentrated.

As previously mentioned, it won't be just USDC holders who are impacted, but every crypto holder. USDC may not be systematically important to America, but it is systematically important to crypto. Crypto in general is a highly leveraged house of cards whose value is more or less derived from the relatively tiny amount of stablecoins that serves as it's foundation.

I didn't know that the SGD is unique. Do you have reading material to forward me? As you can probably tell, i have decent knowledge in crypto but basically zero in tradfi.

Anyway i'm not interested in managing the overconcentration risk. Just the currency risk is fine thank you.

 

[TiedInsurer]

$1 in each currency that your bank has ? Give you perfect rebalancing any way the USD moves

Not sure i follow. I need to be short USD/SGD pair. With leverage so i don't have to tie up too much capital in this thing.

 

[Shiny Things]

My investments are all denominated in USD. After the recent fall in value of USD against the SGD, i think it would be prudent to have some hedge against USD decline going forward. Ideally, this would be a leveraged short on a USD/SGD pair so i don't have too much capital tied up? But not sure how much funding fees this would normally incur.

Do you guys hedge your USD exposure? If so, how?

20% BTC and Ethereum.
80% USDC (basically USD) farming various shitcoins to sell for more USDC.

OK, yeah, a big part of the trade you're making is that you're effectively long USD/SGD.

Normally I'd say "you just shouldn't have the USD exposure in the first place, just buy SGD bonds", or "no you want the foreign currency exposure, don't hedge"... but that's not the exposure you want, and you didn't come to this thread to have me lecture you about the risks of shitcoin farming, so let's come up with a solution.

The easiest way is, like you said, short USDSGD. You can either do this through your spread-betting broker of choice, and pay the daily roll cost; or you can sell SGD futures (these trade on the SGX; the volumes aren't huge but the spreads are nice and tight).

You'll need to take into account that shorting USDSGD has a negative carry - it's about 1.8%/yr if you do it through the futures, and it'll probably be a lot more if you do it through a spread-better. That will be a drag on your returns.

If part of the assets are on margin maybe it can create a natural hedge at the cost of margin interest?

i.e. if the currency crashes, his loan will be so much cheaper to repay

This does sorta work - if you buy assets on margin, in the currency that the asset's denominated in, it creates a partial FX hedge. (If you borrow in, say, yen to buy USD-linked assets, because you think it'll save you 5% a year in carry, you'll get blown up eventually.)

The tradeoff is that then you pay carry costs (see above), and also you've got the risk of getting margin called. (Plus I'm pretty sure the margin treatment for shitcoin tokens is... not great?)

 

[BBCWatcher]

The easiest way is, like you said, short USDSGD. You can either do this through your spread-betting broker of choice, and pay the daily roll cost; or you can sell SGD futures (these trade on the SGX; the volumes aren't huge but the spreads are nice and tight).

Ah, I missed the SGD futures on the SGX! That's probably going to be the winner for this specific question. Thanks, Shiny.

 

[TiedInsurer]

The easiest way is, like you said, short USDSGD. You can either do this through your spread-betting broker of choice, and pay the daily roll cost; or you can sell SGD futures (these trade on the SGX; the volumes aren't huge but the spreads are nice and tight).

You'll need to take into account that shorting USDSGD has a negative carry - it's about 1.8%/yr if you do it through the futures, and it'll probably be a lot more if you do it through a spread-better. That will be a drag on your returns.

Thanks for this, that's a very good idea. 1.8% is ok.

This does sorta work - if you buy assets on margin, in the currency that the asset's denominated in, it creates a partial FX hedge. (If you borrow in, say, yen to buy USD-linked assets, because you think it'll save you 5% a year in carry, you'll get blown up eventually.)

The tradeoff is that then you pay carry costs (see above), and also you've got the risk of getting margin called. (Plus I'm pretty sure the margin treatment for shitcoin tokens is... not great?)

Doesn't work for me because i'm not buying or holding anything on margin at the moment. Besides, nothing in crypto lets you use SGD as the margin collateral, which is why i have forex problems in the first place.

Ah, I missed the SGD futures on the SGX! That's probably going to be the winner for this specific question. Thanks, Shiny.

Thank you too for your assistance and inputs. Much appreciated.

 

[ahnyaahnya]

My investments are all denominated in USD. After the recent fall in value of USD against the SGD, i think it would be prudent to have some hedge against USD decline going forward. Ideally, this would be a leveraged short on a USD/SGD pair so i don't have too much capital tied up? But not sure how much funding fees this would normally incur.

Do you guys hedge your USD exposure? If so, how?

I'm no expert
But my simple logic (flawed or correct?) is that if your investment is denomination in USD but its underlying assets are not USD assets , you don't have to worry about USD depreciation. Cos when that happens, your assets valuation in USD will increase.
For example if you buy a UT of Singapore / Korean /Indian etc assets but you buy the USD version, when USD depreciates, the USD valuation per unit of the UT will increase due to the exchange rate

 

[BBCWatcher]

But my simple logic (flawed or correct?) is that if your investment is denomination in USD but its underlying assets are not USD assets , you don't have to worry about USD depreciation. Cos when that happens, your assets valuation in USD will increase.
For example if you buy a UT of Singapore / Korean /Indian etc assets but you buy the USD version, when USD depreciates, the USD valuation per unit of the UT will increase due to the exchange rate

They could be baskets of wheat or shares of Apple stock as other examples. Yes, your logic is logical. If the value of the U.S. dollar falls relative to other currencies, and nothing else changes — if it's an "exogenous shock" — then asset prices will rise in U.S. dollar terms.

In practice there are second and third order effects — and root causes — when currency exchange rates change. But these effects are highly attenuated and not always obvious or even predictable. For example, a change in the USD-SGD exchange rate would/could affect DBS's real business to some extent, and therefore DBS's share price (which trades on the SGX and is quoted in Singapore dollars).

However, TiedInsurer is holding 80% of his/her entire investment/savings portfolio in USDC, a "stablecoin" that's pegged to the U.S. dollar. U.S. dollar movements (relative to other currencies and in terms of real purchasing power) are supposed to affect USDC in lockstep, by design.

 

[ahnyaahnya]

They could be baskets of wheat or shares of Apple stock as other examples. Yes, your logic is logical. If the value of the U.S. dollar falls relative to other currencies, and nothing else changes — if it's an "exogenous shock" — then asset prices will rise in U.S. dollar terms.

In practice there are second and third order effects — and root causes — when currency exchange rates change. But these effects are highly attenuated and not always obvious or even predictable. For example, a change in the USD-SGD exchange rate would/could affect DBS's real business to some extent, and therefore DBS's share price (which trades on the SGX and is quoted in Singapore dollars).

However, TiedInsurer is holding 80% of his/her entire investment/savings portfolio in USDC, a "stablecoin" that's pegged to the U.S. dollar. U.S. dollar movements (relative to other currencies and in terms of real purchasing power) are supposed to affect USDC in lockstep, by design.

My simple mind doesn't comprehend most of what you're saying

But thanks anyway for your explanation

 

[TiedInsurer]

I'm no expert
But my simple logic (flawed or correct?) is that if your investment is denomination in USD but its underlying assets are not USD assets , you don't have to worry about USD depreciation. Cos when that happens, your assets valuation in USD will increase.
For example if you buy a UT of Singapore / Korean /Indian etc assets but you buy the USD version, when USD depreciates, the USD valuation per unit of the UT will increase due to the exchange rate

Your example is true for assets that have a fundamental value. That's because those assets, represents entities that hold assets and generate cash flow, denominated in a particular currency. So the fundamental value of a Singapore company is always SGD X amount, even if it's stocks might be quoted in USD. It's USD price will adjust itself to reflect the fundamental value of the company which is still SGD X.

For crypto, fundamental value is often (not always) ignored. If people cared about fundamentals, they wouldn't be in crypto. There is no such thing as fundamentals analysis here. What determines price, is liquidity. The price of a crypto, follows it's main liquidity pair. Taken to the extreme (and crypto loves to take things to the extreme), this means coins can often go up or down 10% in 15mins in fiat terms, even though absolutely nobody anywhere in the world bought or sold even a single coin.

Because of this lack of fundamentals, if the market for BTC has $100m of USD liquidity and $100k of SGD liquidity, then it's price is also going to follow USD value and ignore SGD value. If the value of SGD changes in relation to the value of USD, Singaporeans aren't going to say "oh, BTC is cheaper/expensive now, let me buy more/less." This isn't wheat. Singaporeans won't increase their demand just because it's cheaper for them now, which would have driven up the price in SGD. Americans aren't going to buy less because it's more expensive for them now, which would have driven down the price in USD. What happens, is that the market makers will instead arbitrage the USD market for BTC, against the SGD market for BTC, and because the USD market is so much bigger, the SGD market ends up changing price, while the USD price doesn't change because the SGD market is too small for these arbitrage trades to be significant enough to move it.

 

[BBCWatcher]

Your example is true for assets that have a fundamental value. That's because those assets, represents entities that hold assets and generate cash flow, denominated in a particular currency. So the fundamental value of a Singapore company is always SGD X amount, even if it's stocks might be quoted in USD. It's USD price will adjust itself to reflect the fundamental value of the company which is still SGD X.

Not really. Singtel, for example, sells more telecommunication services in Australia than it does anywhere else. Almost all the infrastructure equipment it purchases in the countries where it operates is imported into those countries, and it peers with global telecommunication providers with multi-currency contract terms, probably with quite a few USD contract terms. Consequently shares of Singtel stock are not at all like Singapore dollar bonds, for example.

Singtel's real business certainly isn't immune to fluctuations in the SGD exchange rates. But that's not saying much. Singtel's real business also isn't immune to Australian wildfires, transoceanic cable cuts, a data security breach in India, and how well Apple's new iPhone 16 sells or doesn't sell, as examples. There are myriad business factors that affect its real business and associated enterprise value.